Earnings Call Transcript - CNF Q4 2022

Operator, Operator

Good day, and welcome to the CNFinance Fourth Quarter and Fiscal Year 2022 Unaudited Financial Results Conference Call. I would now like to turn the conference over to Ms. Manager of Capital Markets.

Unidentified Company Representative, Company Representative

Good morning and good evening, and welcome to CNFinance Fourth Quarter and Fiscal Year of 2022 Financial Results Conference Call. In today's call, our Director and Vice President, Mr. Qian Jun, will walk us through the operating results followed by the financial results from our acting CFO, Ms. Li. After that, we will have a Q&A session. Before we start, I would like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expect, anticipates, future, intends, plans, beliefs, estimates, targets, going forward, outlook and similar statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update the forward-looking statements as a result of new information, future events or otherwise, except as required under law. Now please welcome Mr. Qian Jun.

Qian Jun, Director and Vice President

Thank you for joining us today. In this conference call, we will present the company’s financial and operational results for the fourth quarter and fiscal year of 2022, followed by a Q&A session. For the fiscal year of 2022, the company generated interest income of RMB 1.7 billion and net revenue under the commercial bank partnership model of RMB 58 million, resulting in a net profit of RMB 140 million, an increase of 111% compared to the same period last year. Despite the strict pandemic prevention and control policies in 2022, the company managed to achieve year-on-year growth in both business sales and profitability, primarily due to several key factors. We actively promoted new products and expanded our customer base. Since its launch in 2021, the commercial bank partnership model has gained traction in the market and among our partners. Following intensive collaboration with private banks, including [indiscernible] Bank in 2022, the growth of this partnership model accelerated in the latter half of the year and was firmly established by the year's end. In 2022, we referred a total of RMB 2.5 billion in loans to banks, meeting our target set at the start of the year. The net revenue from the commercial bank partnership model also saw an increase. We successfully reduced funding costs. At the year's outset, management forecasted potential changes in conditions and expected an abundance of funding. The developments throughout the year aligned with these expectations. Consequently, to maximize the benefits from fee reductions offered by financial institutions, we engaged in continued negotiations with our trust company partners and secured agreements to lower funding costs in the second half of 2022. The company also became more engaged in the capital market this year, pursuing a secondary offering and actively connecting with both domestic and international investors. This context has led us to observe that both domestic and international investors maintain a positive perspective on China's inclusive financial industry, which further strengthens our confidence. However, it's crucial to acknowledge that despite our business achievements, there is still room for improvement due to the pandemic's impact on borrowers' solvency and overall efficiency. Following the NPL, we experienced an uptick in our delinquency ratio, putting additional pressure on our sales partners concerning the repurchase of defaulted loans. In response, we allowed more partners to fulfill their repurchase obligations through installment payments, charging for services, which helped enhance their liquidity and diversify our revenue mix. We also plan to refine our installment repurchase policy in 2023 to further ease the burden on our sales partners, which I will discuss in detail later. As we look ahead, we anticipate 2023 to present ongoing uncertainties, as highlighted in the recently released government report addressing the numerous challenges facing China’s development. In 2023, our focus will be on growth in scale, facilities, and service quality as we continue our transformation into a service platform aimed at high-quality development. Our specific objectives include the introduction of new products, model upgrades, customer base expansion, and growth in scale. We will deepen our collaboration with commercial banks by negotiating with our current partners and exploring new partnerships, while also integrating sales partners into the commercial bank partnership model, enabling them to offer private enhancements with CNFinance serving as the service provider. We will persist in upgrading our funding model. Besides continuing to lower funding costs in 2023, we aim to engage in negotiations with venture capital institutions for refinancing options on non-performing assets to support sales partners meeting their repurchase obligations through installment payments. We will continue to invest in technology and accelerate digital transformation, planning significant investments in 2023 to develop an intelligent risk control system based on data gathered through research and analysis, optimizing our processes to facilitate business development. We will also prioritize asset quality by ensuring a balance between growth and maintaining asset quality. This involves optimizing our credit approval model and utilizing market data to determine the focus areas for improvement. Currently, we plan to concentrate on expanding our business in Taiwan and New Taiwan cities. The recent government report reiterates the support for the growth of the private economy and private enterprises, affirming the belief in the ongoing strategic opportunities for China's inclusive financial industry. Additionally, with anticipated adjustments to pandemic prevention policies and the government's efforts aimed at stimulating demand, we believe that China's economy has the potential for recovery. We aim to deepen our internal reforms to provide better financing services for more micro and small business owners, contributing to the advancement of inclusive finance in China. Now, I will turn the call over to Ms. J. Li, the acting CFO, who will provide insights into the financials for the fourth quarter and fiscal year of 2022.

Jing Li, Acting CFO

Thanks, Mr. Qian, and thanks again to everyone joining us today. I will go through the fourth quarter and fiscal year of 2022 financials. We believe year-over-year comparison is the pathway to review our performance. Unless otherwise stated, all percentage changes I am going to give will be on that basis. Also, unless otherwise stated, all numbers I am going to give will be in RMB. We will start with the fourth quarter of 2022 first and followed by the results of the fiscal year. During the fourth quarter of 2022, total loan origination volume was RMB 3 billion and the total volume of loans recommended to commercial banks was RMB 2 billion. Total interest and fees income was RMB 455 million. Interest income charged to sales partners was RMB 33 million, which represents the fee charged to sales partners who chose to repurchase the default loans in installments. Collaboration costs for sales partners, representing the sales incentives paid to sales partners, decreased to RMB 80 million from RMB 120 million in the same period of last year. This primarily attributed to a lower average rate the company paid to its sales partners in the fourth quarter of 2022 as compared with last year. The net revenue under the commercial bank partnership model, representing fees charged to commercial banks for services, including introducing borrowers, initial credit assessment, facilitating loans from banks to borrowers and providing technical assessments to borrowers and banks, net of fees paid to a third-party insurance company was RMB 58 million. The company has started to collaborate with commercial banks since last year, and such collaboration grew and scaled in the second half of this year. The net income was RMB 30 million, compared with a net loss of RMB 105 million in the same period of last year. And now let's move to the results for the fiscal year of 2022. The total interest and fees income was RMB 1.7 billion, and the total interest and fees expense was RMB 785 million. The interest income charged to sales partners, representing fees charged to sales partners who choose to repurchase default loans in installments, increased to RMB 122 million from RMB 33 million in the same period of last year. The collaboration cost for sales partners, representing the sales incentives paid to sales partners, decreased to RMB 321 million from RMB 426 million for the same period of 2021. Net revenue under the commercial bank partnership model, representing fees charged to commercial banks for introducing borrowers, initial credit assessments, facilitating loans from the banks to borrowers and providing technical assessments to the borrowers and banks, net of fees paid to the third-party insurance company was RMB 58 million this year. The net interest and fees income after collaboration costs was RMB 683 million, representing an increase of 11% as compared with RMB 615 million in the same period of last year. The provision for credit losses was RMB 238 million for this year compared to a reversal of RMB 273 million in the same period of last year. The reversal last year was primarily due to the fact that the company transferred loans under a traditional facilitation model to third parties in bulk during the fourth quarter of 2021, and the allowance of such loans was reversed. The increase in provision for credit losses this year was mainly due to the economic uncertainty caused by the COVID-19 pandemic and the relevant prevention and control measures, as well as the downward pressure faced by China's real estate market during 2022. Net loss on sales of loans was RMB 45 million for the fiscal year of 2022 compared to RMB 451 million in the same period of last year, primarily attributable to the fact that the company transferred loans under the traditional facilitating model to third parties in bulk during the first quarter of last year. Such loans were all facilitated prior to 2019, and the majority of them were long past due. Other gains net of RMB 90 million compared with RMB 19 million in the same period of last year. This was primarily attributable to the increase of credit risk mitigation positions forfeited by sales partners. Total operating expenses decreased by 11% to RMB 339 million as compared to RMB 381 million for the same period of last year. Net income increased by 111% to RMB 138 million for the fiscal year of 2022 compared to RMB 65 million for the same period last year. The delinquency ratio, excluding loans held for sale for loans originated by the company, was 18.3% as of December 31, 2022. The NPL ratio, excluding loans held for sale for loans originated by the company, decreased from 2.1% as of December 31, 2021, to 1.1% as of December 31, 2022. With that, we'd now like to open up the call for Q&A, please?

Operator, Operator

Our first question will come from William Gregozeski of Greenridge Global.

William Gregozeski, Analyst

Could you talk about your expectations for origination for the current year, especially between the split between trust and commercial? Because you did so much commercial origination in the fourth quarter, what is that percentage going to look like across this current year?

Qian Jun, Director and Vice President

So our targeted total loan origination volume in 2023 is around RMB 20 billion, which is about a 40% increase from that of 2022. We're hoping 40% of that RMB 20 billion will come from loans recommended to commercial banks.

William Gregozeski, Analyst

Okay. Great. Given the general economic uncertainty and property market uncertainty, are you seeing more sales partners joining the platform due to the additional services you provide in risk management and the installment plan compared to their previous methods?

Qian Jun, Director and Vice President

Okay. So based on the data, I am very happy to see that the number of active sales partners as of the end of 2022 actually increased by about 100, which is a 10% increase compared to the end of 2021. I also want to mention that besides the better services we can provide them, the better risk management and external funding, there are two major reasons why sales partners are more willing to join our platform. The first reason is their confidence in how China's economy is going to pick up. The second reason is that the repurchase by installment policy we rolled out in 2022, which I believe really helps them ease their liquidity pressure and manage their risks better.

William Gregozeski, Analyst

Okay. Great. As far as your current loan to value, do you guys have that ratio where it stood at the end of the year compared to the year-ago period?

Qian Jun, Director and Vice President

So at the end of 2022, the average LTV ratio is around 60%, which remained rather stable through the past three years.

William Gregozeski, Analyst

Given that you are now separating the income charge to sales partners for these installment loans, do you expect this number to increase throughout the year? Or will it begin to decrease as the economy improves? How should we view that particular line item?

Qian Jun, Director and Vice President

Could you repeat the second part of the question, please?

William Gregozeski, Analyst

Yes. More just wanting to get an idea of where you guys see the interest charge to sales partners line item going over the course of '23. Is it going to increase throughout, or increase and then start tailing off?

Qian Jun, Director and Vice President

Okay. So based on what we are seeing regarding how the economy is picking up and recovering, I think the overall asset quality of the loans originated by us will be better, which is going to drive down the overall delinquency ratio. Therefore, I think the total scale of how much the sales partners have to repurchase is going to go down. Consequently, I believe the interest income charged to our sales partners is going to remain relatively stable in 2023 with a slight decrease.

William Gregozeski, Analyst

Okay. And last question is more just general. Given the current environment, what do you guys see as the biggest risk for the company and biggest opportunity for the current environment?

Qian Jun, Director and Vice President

Okay. So I think the major challenge for CNFinance is whether we can contain the increase of the delinquency ratio, especially following the adjustments to the pandemic prevention and control policies. This means we have to focus more on asset quality. To address this challenge, we are going to take a few measures, including focusing more on expanding our businesses in Tier 1 and new Tier 1 cities and lowering the proportion of our activities in Tier 2 and Tier 3 cities. We also want to utilize technology to refine the loan approval process and manage risks better. Moreover, I see opportunities presented to us: firstly, how China's economy is going to recover post the adjustment of the pandemic prevention and control policies; secondly, we are finally seeing the trading volume and property price in core areas start to recover, and since the majority of our business was conducted in such regions, I believe that's good news for us.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Jane for any closing remarks.

Unidentified Company Representative, Company Representative

Thank you for joining us today. If you have any questions, please feel free to contact us at ir@cashchina.cn. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.